Income Tax (Advanced)

General rules: Benefits in kind (BIKs) provided by reason of employment are taxable on the employee, and employer pays Class 1A NIC. Complex benefits have specific statutory rules.

Company cars:

• Taxable benefit = list price × CO₂-based percentage
• The CO₂ percentage is based on the car's emissions (in g/km):
  • 0 g/km (fully electric): 2% (for 2024/25)
  • Hybrids: depends on electric range and emissions — can be 2-14% for plug-in hybrids
  • Other petrol/diesel: starts at 15% for low emissions and rises up to a maximum of 37%
  • Diesel surcharge: +4% for diesel cars not meeting RDE2 standard (max 37%)
• List price includes accessories (first £100 ignored); less employee capital contribution (max £5,000)
• Reductions: pro-rata for unavailability (>30 days), pro-rata for employee contributions for use

Fuel benefit (for company car):

• If employer provides fuel for private use: benefit = £27,800 × CO₂ percentage (2024/25 multiplier)
• Applies regardless of actual fuel cost — flat scale
• No pro-rata unless fuel provision ceases permanently mid-year
• No benefit if employee reimburses ALL private fuel cost

Van benefit:

• Flat annual rate: £3,960 for vans with CO₂ emissions; £0 for fully electric vans (2024/25)
• Fuel benefit for vans: flat £757 (2024/25)

Living accommodation:

• Basic charge: the HIGHER of annual value (rating assessment) or rent paid by employer
• Additional charge if property cost employer >£75,000: (cost − £75,000) × official rate of interest (currently 2.25%)
• "Cost" = market value when employee first occupied if property owned 6+ years by employer before first occupation, otherwise actual cost to employer
• Some exemptions: accommodation necessary for duties (caretaker, minister), customary for that type of employment, or provided for security

Cheap/interest-free loans:

• Taxable benefit = difference between official rate of interest (2.25%) and actual interest paid
• Exemption: total loans ≤ £10,000 throughout the year (de minimis)
• Applied to AVERAGE balance (simple method) or alternatively more accurate daily calculation

Other common BIKs:

• Medical insurance: taxable on premium cost
• Mobile phone: ONE phone exempt if contract in employer's name
• Workplace parking: exempt
• Canteen meals: exempt if available to all staff
• Employer pension contributions: exempt (but see annual allowance rules)
• Childcare vouchers: closed to new claimants 2018 but existing claims continue
• Tax-free childcare: different government scheme

Expense reimbursements and Section 336 ITEPA: Reimbursed expenses are generally taxable unless incurred "wholly, exclusively and necessarily" in the performance of duties. Business mileage in own car: reimbursement up to AMAP rates (45p per mile first 10,000, 25p thereafter) is tax-free.

Tax-advantaged (approved) share schemes: Favourable tax treatment if statutory conditions met. UK has four main approved schemes:

Unapproved share schemes: Any scheme not meeting statutory conditions.

• Grant of option: usually NO income tax (since no certain value at grant)
• Exercise: Income tax on "gain" = (Market value at exercise − exercise price) × shares. NIC also applies if the shares are "readily convertible assets" (e.g., listed shares).
• Sale: CGT. Base cost = Market value at exercise (already taxed to income tax) + exercise price.

Restricted stock units (RSUs):

• Unapproved scheme — shares granted free but vesting over time
• Income tax at vesting based on market value at vest
• CGT on subsequent sale from a base = market value at vest

Tax planning considerations:

• EMI offers the most tax-efficient treatment for qualifying small companies
• Holding shares after exercise/vesting converts future gains from income (up to 45%) to capital (up to 20% / 28% residential) — valuable differential
• Business Asset Disposal Relief (BADR) gives 10% CGT rate on qualifying disposals up to £1m lifetime limit
• Timing of exercise/sale needs planning to use annual exemption, BADR, and ISA/EIS reliefs

Property income overview:

• Rental income from UK property (excluding trading income from property-dealing businesses)
• Aggregated across all UK properties into a single "property business" per landlord
• Taxable income = rental receipts LESS allowable expenses
• Accruals basis mandatory for gross rents > £150,000; cash basis optional below (default for small landlords)

Allowable expenses (residential):

• Repairs and maintenance (but NOT improvements — capital nature)
• Insurance, ground rent, service charges
• Letting agent fees
• Professional fees (accountancy, legal)
• Council tax and utilities during void periods (if landlord pays)
• Replacement of domestic items relief: cost of replacement (like-for-like) for furnishings (beds, sofas, curtains, carpets, white goods, crockery). No initial items allowed — only replacements.
• Interest on loans — RESTRICTED for residential (see below)

Residential property interest restriction (finance cost relief):

• Since 2020/21, finance costs (mortgage interest, loan arrangement fees) on residential lets are NOT deductible from rental income
• Instead, landlord gets a BASIC-RATE TAX CREDIT of 20% × finance costs
• Affects higher/additional rate landlords — effectively pay tax at their top rate on rent, less 20% credit on interest
• Does NOT apply to commercial property or furnished holiday lettings

Worked example: Higher-rate landlord, annual rent £20,000, mortgage interest £8,000, other expenses £3,000.

• Taxable property profit: £20,000 − £3,000 (other expenses) − £0 (interest NOT deducted) = £17,000
• Tax on property profit at 40%: £6,800
• LESS finance cost relief: £8,000 × 20% = £1,600
• Net tax: £6,800 − £1,600 = £5,200
• Compare old rules (pre-2020): profit £20k − £3k − £8k = £9k × 40% = £3,600. Increase under new rules: £1,600.

Rent-a-room relief:

• Available where a room in the taxpayer's MAIN RESIDENCE is let furnished
• Limit: £7,500 per year (£3,750 if let jointly)
• If gross rent ≤ £7,500: tax-free (no return needed unless required for other reasons)
• If gross rent > £7,500: two options:
  • Option A: taxable = gross rent − £7,500 (no expenses)
  • Option B (default): taxable = gross rent − actual expenses (normal rules)
  • Choose whichever is lower

Furnished Holiday Lettings (FHL):

Special regime for qualifying holiday lets. Conditions:

• Furnished and LET COMMERCIALLY
• AVAILABLE for holiday letting > 210 days per year
• ACTUALLY LET to holidaymakers > 105 days per year
• Longer lets (31+ continuous days) must not exceed 155 days total

Tax advantages of FHL:

• Treated as a TRADING activity for many purposes (despite being "property")
• Capital allowances on furniture/equipment (not available for normal residential lets)
• Profits count as "earned income" for pension contribution purposes
• CGT reliefs available: Business Asset Disposal Relief, rollover relief, gift relief
• NOT subject to the residential interest restriction (interest fully deductible)

⚠️ FHL regime abolition: The UK government announced abolition of the FHL regime from 6 April 2025 (2025/26 onwards). FHL properties will then be treated as normal residential lets.

Trading income = Profits from trades, professions, and vocations carried on as sole trader or partnership. Starts with accounting profit and adjusts to taxable profit.

Adjustment of profits (high-level):

Common disallowable expenditure:

• Capital expenditure (claim via capital allowances instead)
• Depreciation and amortisation (add back; get capital allowances instead)
• Entertaining customers (though staff entertaining generally allowed up to £150/head/year)
• Private expenditure / proportion of costs — e.g., use of home: business use only allowable
• Taxes on income (no deduction for income tax or corporation tax)
• Non-trade interest
• Fines and penalties (e.g., speeding fines) — generally disallowed unless very minor parking fines incurred during business journeys (varies)
• Gifts to customers — allowable only if: £50 or less per recipient per year, not food/drink/tobacco/vouchers, and advertise the business
• Political donations, private donations
• Proprietor's salary/drawings (not a deduction — business profits ARE the owner's income)

Goods for own use: Mark-up to selling price must be added to profits (as if goods had been sold at retail). A common trap.

Basis period reform (from 2024/25):

• Before 2024/25: "preceding year basis" — profits taxed in tax year based on accounts year ending in that tax year. Complex rules for opening years, closing years, and overlap profits.
• From 2024/25: "tax year basis" — profits taxed for the tax year (6 April − 5 April)
• If accounts not prepared to 31 March/5 April, profits must be apportioned between tax years
• Transitional year (2023/24) combined old and new rules; overlap profits brought forward are relieved
• Transition profits spread over 5 years (2023/24 − 2027/28) unless taxpayer elects otherwise

Capital allowances in detail:

Main pool (18% WDA):

• Most plant and machinery (office equipment, vehicles, tools)
• Written down annually at 18% on a reducing balance basis

Special rate pool (6% WDA):

• Long-life assets (25+ year expected life), integral features (electrical systems, cold water systems, heating), thermal insulation, cars with CO₂ > 50g/km (or high emissions threshold — check current year)
• Written down at 6%

Annual Investment Allowance (AIA):

• £1 million per year
• 100% first-year allowance on most plant and machinery (main and special rate pools — except cars)
• Can be allocated flexibly between pools — usually allocate to special rate pool FIRST (as lower WDA otherwise)

First-Year Allowances (FYAs):

• Various FYAs for specific items: new electric cars (100%), low-emission cars, energy-saving equipment, zero-emission goods vehicles
• Full-expensing (100% FYA on main pool plant for companies — different to sole traders)

Structures and Buildings Allowance (SBA):

• 3% per year on straight-line basis for NEW non-residential buildings (purchased or constructed)
• 33⅓ year cost recovery — long but meaningful
• Does NOT apply to residential buildings

Small pools write-off: If balance in main or special rate pool ≤ £1,000 after additions/disposals, can write off the entire balance (avoids very small WDAs forever).

Private use of assets (sole traders):

• If an asset has private use (e.g., a car used partly privately), the writing-down allowance is RESTRICTED by the business use percentage
• Full WDA calculated on pool, then restricted to business proportion
• Asset kept in a SEPARATE pool (private use asset pool)

Balancing allowance/charge:

• On disposal of an asset or cessation of trade: compare disposal proceeds to tax written-down value (TWDV)
• Proceeds > TWDV → BALANCING CHARGE (taxable — previously over-claimed CAs)
• Proceeds < TWDV → BALANCING ALLOWANCE (deductible — previously under-claimed)
• For pools: balancing adjustment only on cessation of trade

Pension contributions attract tax relief — they reduce taxable income. Major changes in recent years.

Annual allowance (AA):

• Standard AA: £60,000 per tax year (increased from £40,000 in April 2023)
• The AA is the TOTAL of employee contributions + employer contributions + deemed contributions for defined benefit schemes
• Exceeding AA creates an "AA charge" equivalent to income tax at the taxpayer's marginal rate on the excess
• Relief for contributions is capped at the greater of: £3,600 and 100% of relevant earnings

Tapered annual allowance (high earners):

• If threshold income > £200,000 AND adjusted income > £260,000: AA is REDUCED
• Reduction: £1 for every £2 of adjusted income over £260,000
• Minimum AA: £10,000 (reached when adjusted income ≥ £360,000)
• "Threshold income" = taxable income excluding pension contributions that receive tax relief at source
• "Adjusted income" = taxable income PLUS all pension contributions (employee + employer)

Carry forward of unused AA:

• Can carry forward unused AA from the PREVIOUS 3 years
• Must have been a member of a pension scheme in those years (even if no contributions)
• Use current year AA first, then oldest unused year
• Useful for one-off large contributions in a high-earnings year

Money Purchase Annual Allowance (MPAA):

• Applies if the taxpayer has FLEXIBLY ACCESSED their pension (e.g., taken taxable flexi-access drawdown)
• Reduced AA of £10,000 (2024/25) for money purchase (defined contribution) contributions only
• Designed to prevent "recycling" — drawing down and re-contributing to get double tax relief

Lifetime Allowance (LTA) — abolished:

• LTA abolished from 6 April 2024
• Replaced by: Lump Sum Allowance (LSA) — £268,275 tax-free lump sum limit; Lump Sum and Death Benefit Allowance (LSDBA) — £1,073,100 overall tax-free lump sum limit
• Individual protections from the LTA era remain — protected amounts

Methods of relief:

• Net pay arrangement: Employer deducts pension contributions BEFORE calculating PAYE tax. Full relief at marginal rate automatic.
• Relief at source (RAS): Employee pays contribution from net pay. Scheme claims back 20% basic-rate relief. Higher-rate and additional-rate taxpayers claim extra relief via self-assessment (or adjusted tax code).
• Gross contribution: the effective contribution = net payment / 0.80 (for basic-rate); tax relief on gross amount.

Worked example — high earner:

Laura has salary £250,000, bonus £80,000, employment benefits £15,000. She made £20,000 of personal pension contributions (net of basic rate relief). Employer contributed £30,000 to DC pension. No other income.

• Gross personal contribution = £20,000 / 0.80 = £25,000
• Threshold income: £250,000 + £80,000 + £15,000 − £25,000 (personal pension gross, receiving relief at source) = £320,000. > £200,000. Continue with taper test.
• Adjusted income: £250,000 + £80,000 + £15,000 + £30,000 (employer contributions) = £375,000. Wait — should also add back personal contribution? Yes, if deducted in arriving at taxable income. But personal contributions via RAS are NOT deducted from threshold income (they're deducted from net taxable income). So adjusted income = taxable income + ALL pension contributions.
• Let me recalculate: taxable income = £345,000 (salary + bonus + BIKs); adjusted income = £345,000 + £25,000 (personal) + £30,000 (employer) = £400,000
• Excess over £260,000: £400,000 − £260,000 = £140,000. Taper: £140,000 / 2 = £70,000 reduction. But minimum AA = £10,000. So AA = max(10,000, 60,000 − 70,000) = £10,000
• Total contributions: £25,000 + £30,000 = £55,000 > £10,000 AA → excess £45,000
• AA charge at marginal rate (45%): £45,000 × 45% = £20,250
• Check carry forward from previous 3 years — may reduce the charge significantly

The standard personal allowance (PA) for 2024/25 is £12,570. But it is TAPERED AWAY for high earners.

PA restriction:

• If Adjusted Net Income (ANI) > £100,000: PA reduced by £1 for every £2 of ANI over £100,000
• PA fully removed when ANI ≥ £125,140 (£12,570 × 2 + £100,000)
• Effective MARGINAL RATE for income in £100,000 − £125,140 range: 60% (40% tax on income + 20% due to lost PA = 60%)
• Tax planning opportunity — above £100k, pension contributions or gift aid donations provide effective 60% relief (in addition to their normal tax relief)

Adjusted Net Income:

Worked example — ANI £115,000:

• Reduction in PA: (£115,000 − £100,000) / 2 = £7,500
• Remaining PA: £12,570 − £7,500 = £5,070
• If ANI instead £90,000: full PA £12,570
• If ANI instead £130,000: no PA

Tax planning for 60% zone:

For someone with taxable income in the £100-125k band, making a gross Gift Aid donation or personal pension contribution:

• Reduces ANI → restores some PA
• Plus gets normal higher-rate tax relief
• Effective marginal relief can be 60% (reclaim lost PA plus 40% higher-rate relief)
• A £1,000 gross pension contribution (£800 net after basic-rate relief) costs an effective £400 after 60% relief

Marriage Allowance: Lower earner (income below £12,570) can transfer £1,260 of PA to basic-rate spouse/civil partner, saving them £252. Not available if either party is higher-rate taxpayer.

Blind Person's Allowance: Extra £3,070 (2024/25) — transferable to spouse if unused.

Structure of the income tax computation:

Three income types taxed at different rates — order matters:

1. Non-savings income (employment, trading, property, pensions) taxed first at 20%/40%/45% bands
2. Savings income (interest) taxed next at same band rates
3. Dividend income taxed last at 8.75%/33.75%/39.35%

2024/25 tax bands (England, Wales, NI):

• Personal allowance: £12,570 (tapered above £100k)
• Basic rate band (20%): £0 − £37,700
• Higher rate band (40%): £37,701 − £125,140
• Additional rate (45%): > £125,140

Scotland: Different bands (6 bands including a starter rate 19%, basic 20%, intermediate 21%, higher 42%, advanced 45%, top 48%).

Savings income specifics:

• Starting rate band: £0 − £5,000 at 0% for SAVINGS INCOME — but only to the extent non-savings income doesn't exceed £5,000
• Personal Savings Allowance (PSA): £1,000 for basic-rate, £500 for higher-rate, £0 for additional-rate. First £X of savings income within this allowance is taxed at 0%.

Dividend income specifics:

• Dividend allowance: £500 (2024/25, reduced from £1,000) — first £500 of dividends taxed at 0%
• Then 8.75% (basic), 33.75% (higher), 39.35% (additional)
• Dividend allowance uses the person's tax band (i.e., even within the allowance, dividends count towards determining which band you're in)

Marriage Allowance: Reduces tax by £252 (basic rate on £1,260 transferred).

Worked example — full computation:

Rachel, 2024/25:

• Salary £85,000; bonus £15,000; BIKs £5,000 → Employment income £105,000
• Trading income (side business) £12,000
• Property income £8,000 (after residential interest restriction applied later)
• Interest £3,500
• Dividends £2,500
• Gift Aid £1,000 net (£1,250 gross)
• Personal pension contributions £4,000 net (£5,000 gross)

Adjusted Net Income: £105k + £12k + £8k + £3.5k + £2.5k = £131,000 − £1,250 − £5,000 = £124,750. > £100,000 so PA restricted.

PA reduction: (£124,750 − £100,000) / 2 = £12,375. Remaining PA = £12,570 − £12,375 = £195.

Extended basic rate band: £37,700 + £1,250 (Gift Aid) + £5,000 (pension) = £43,950. Extended higher rate band: £125,140 + £6,250 = £131,390.

Tax computation:

Split: Non-savings £124,805 (after interest and dividends deducted); savings £3,500; dividends £2,500.

• Non-savings (£124,805): £43,950 × 20% = £8,790 + £80,855 × 40% = £32,342 → £41,132
• Savings (£3,500): all within higher rate band, but £500 PSA at 0%. £3,000 × 40% = £1,200
• Dividends (£2,500): first £500 at 0%. £2,000 within extended HR band at 33.75% = £675
• Total tax: £41,132 + £1,200 + £675 = £43,007

(Slightly simplified — would also show band usage chronologically and tax credits.)